The best of times, the worst of times

Posted by: Paul Donovan

01 Jul 2020

Daily update

  • The US equity market just had the best quarter in over 21 years. The US economy has just had the worst quarter on record. How can this happen? It is not the Fed's money printing, but the commitment to low interest rates is a powerful boost for equities. Fiscal stimulus hopes also hit markets before they hit the economy.
  • It is worth remembering that listed companies are a relatively minor part of any economy, and the virus is generally hurting small businesses more than listed businesses. Thus, earnings should outperform GDP. The virus is accelerating structural changes in the economy, which may benefit some listed companies.
  • In the UK, Prime Minister Johnson unveiled an infrastructure program that seems designed to tackle the challenges of the first industrial revolution (unfortunately we are facing the fourth industrial revolution). Bank of England Chief Economist Haldane admitted to being too pessimistic on the UK economy.
  • Assorted business sentiment opinion polls are being published, and can be ignored. There is still little evidence the questions are being answered correctly. German retail sales were strong in May. When consumers leave lockdown, they will spend. In a crisis, there is always a tendency to underestimate the resilience and adaptability of the consumer.

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